Analyzing apartment real estate is both an art and a science. There are several factors that need to be considered if you want an investment that offers high returns. Using the best system to analyze properties can help ensure that you’re making a sound investment.
What components make up this system?
- Cap Rate: Calculated by taking the yearly net operating income as a percentage of the property’s value. A property that generates $50,000 per year and has a value of $1,000,000 would have a cap rate of 5%.
- Gross Rent Multiplier: Takes the value of the property and divides it by gross annual rents.
- Price Per Unit: A property’s per-unit pricing is calculated by dividing the total purchase price by the number of units. This is a common metric used for multifamily properties.
- Location: One of the most important metrics when evaluating a multifamily property. The building can be in pristine condition, but if the location is poor, it will be a failed investment. Apartment real estate in high-growth areas will likely generate better results compared to a multi-unit building in a rural area.
- Parking: What is the parking situation at the property? Tenants will want easy-access and ample parking. Dedicated parking, such as reserved spaces or garages, can provide an additional stream of income. Generally, properties with sufficient parking will retain tenants for longer.
- Management Costs: Professional property managers will charge up to 10% of the collected rent.
- Vacancy: Refers to how much rent is lost when turning over a rental unit and is calculated as a percentage. The cost will depend largely on demand and your property manager’s competence. In high-demand markets, the percentage may only be 4%, but in markets with fewer renters, the cost can be as much as 15% or more.
- Capital Expenses: In addition to short-term expenses associated with upkeeping a property, there are also major repairs to consider, such as the roof or HVAC system. These costs should be taken into consideration and accounted for when calculating your expenses and rent prices.
Evaluate the Property’s Performance in Tough Times
When investing in multifamily properties, it’s important to look at the unit’s history. If possible, look at the past performance to see how well it performed during economic downturns.
If the property still fared well, all things considered, then it may be worth taking a closer look.
Look for Indicators That the Property May Not Perform
When analyzing properties, it’s important to look for signs that it may not perform. Some red flags to look for include:
It’s fine for a property to show signs of normal wear and tear, but when a building and many of its units have excessive deferred maintenance, this could be a red flag.
Not only will this add to your overall costs, but it may also be a sign that more major repairs will be needed in the near future.
Negative Tenant Feedback
Getting feedback from tenants can help determine whether a property has a bright future. If tenants are unhappy, find out why. Are these issues that you can resolve, or are they more to do with location and other factors outside of your control?
Looking at the property’s past performance can also give you an idea of whether it will perform in the future.
Look for Other Red Flags
When investing in multifamily properties, you also have to look for other red flags when analyzing properties, such as:
- A shrinking job market
- A single community employer
- Economic downturn
- Shrinking population
The most successful properties tend to be in locations where the job market is growing, and rentals are in high demand. Urban areas often attract a higher percentage of renters compared to rural and suburban areas.
Want to learn more about how we analyze properties and our investment opportunities? Contact us today at ovaliacapital.com to set up an introductory phone call.